New Year, New Index-Linked Variable Annuity Actuarial Guideline? BY ANN BLACK, ROBERT KIM, AND JORDAN LUCZAJ
On November 29, the NAIC Index-Linked Variable Annuity (A) Subgroup (ILVA Subgroup) issued a proposed 2Model 805, Standard Nonforfeiture Law for Individual Deferred Annuities, to annuity products that periodically credit index-based interest to the annuity value. The index-based interest is based on the performance of one or more indexes or a specified portfolio of assets, and the index-based interest may be negative. Comments on the proposed actuarial guideline are due by January 27, 2022. The ILVA Subgroup was charged with providing “recommendations and changes, as appropriate, to nonforfeiture, or interim value requirements related to index-linked variable annuities.” To address this charge, the ILVA Subgroup took a fresh look at ILVAs and developed the proposed actuarial guideline, which:
The proposed actuarial guideline may be viewed as striking midnight for some interim value formulas as it proposes to allow an ILVA to be considered a variable annuity only if the ILVA’s interim value is based on the market value of (i) actual separate account assets or (ii) a hypothetical portfolio of assets, each of which supports the guarantees of the contract. If the interim value is based on a hypothetical portfolio of assets, the proposed actuarial guideline imposes the following additional requirements:
y Would allow an index-linked variable annuity y An actuary must describe the hypothetical portfolio and any difference (ILVA) to be viewed as a variable annuity even in value between the hypothetical portfolio and the index option value at though ILVA’s values are not based on separate the beginning of the index term. account unit values if certain conditions are satisfied. Thus, the ILVA would not need to y The hypothetical portfolio must be “designed to perfectly hedge the comply with Model 805’s minimum guaranteed benefit guarantees at the end of the term.” interest and minimum guaranteed value y The market value of the hypothetical portfolio must be determinable requirements. daily. y Sets forth interim value requirements for an ILVA seeking to be viewed as a variable annuity. y The hypothetical portfolio must include a “fixed-income asset proxy” and a “derivative asset proxy.” The “fixed-income asset proxy” must The proposed actuarial guideline recognized represent “a zero-coupon bond that accrues interest, simple or that fitting ILVAs into Model 250 is not compound, over the index term and matures for a value equal to the “straightforward” because ILVAs’ daily values initial index option value.” The “derivative asset proxy” must represent are not based on the value of units of a separate “a package of hypothetical derivative assets designed to hedge the risks account. Rather, the daily values are based on associated with guaranteeing the index option value.” formulas set forth in the ILVAs’ contract. Currently, During the December 8 Life Actuarial Task Force meeting, the chair of an ILVA’s formula: the ILVA Subgroup explained the rationale behind the proposed interim y At the end of the index option term, looks to the requirements. The proposed requirements seek to ensure if an ILVA contract holder is being subject to the risk of loss, then the contract holder performance of one or more indexes. should also benefit from gains, in the actual separate account assets or y During the index option term, may take into hypothetical portfolio assets, as may apply. account the time remaining until the end of the index option term, the change in market value If these requirements are adopted, insurers may need to revise their ILVAs of the assets used by the insurer to hedge its to comport with the actuarial guideline’s interim value requirements. obligations to pay the index-based interest, In addition, a number of questions arise with respect to the additional the change in a hypothetical asset pool that hypothetical portfolio requirements including: replicates the insurer’s hedges, and/or the actual change in the index to date, including the • What is meant by “designed to perfectly hedge the benefit full loss to date. While similar types of formulas guarantees”? are used in many ILVAs, there is variation on how interim values are determined among the ILVAs.
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Life, Annuity, and Retirement Solutions | Volume III, December 2021 • EXPECTFOCUS.COM
